Ohio Attorney General Cordray Joins BofA Litigation Club
Ken Lewis' litigation fan club just got some new fans. Looks like one more person, this time Ohio Attorney General Richard Cordray, is joining the fight against what Dick Bove has called the "great distraction." And while Dick would undoubtedly love to bury not just the Merrill scandal deep under the carpet, but also all his recommendation calls from last year, others seem less sanguine about what virtually everyone (except the bank itself, of course) acknowledges is blatant securities fraud. The Attorney General noted in the class action lawsuit, filed on behalf of five pension funds,
that he could seek billions in damages. More relevantly, he plans to
take sworn testimonies from such current and former executives Mr. Lewis and the commode expert himself, John Thain.
“They were concealing billions of dollars in losses with one hand and
clearing the way for extravagant bonus payments with the other,” said
Attorney General Cordray. “This case gives the public pension funds
and other shareholders a chance to stand up against Wall Street.”
The lawsuit alleges that Bank of America, during merger
negotiations, agreed to allow Merrill Lynch to pay up to $5.8 billion
in discretionary year-end bonuses to its executives and employees, but
failed to disclose that material information important to shareholders.
Additionally, in the two months just prior to the shareholder vote
on the merger, Merrill Lynch suffered billions in losses. The
complaint alleges that senior executives at both Merrill Lynch and Bank
of America were aware of these massive and highly material losses but
did not disclose the information to investors prior to the vote.
And some more informative disclosures from the lawsuit:
During the abbreviated merger negotiations, BoA and Merrill spent considerable time negotiating the discretionary year-end bonuses that Merrill executives and employees would receive for 2008. The bonus discussions lasted until 2 a.m. on September 15, and ultimately BoA agreed to allow Merrill to pay up to $5.8 billion in discretionary year-end bonuses – an amount which represented 12% of the merger price, and more than 75% of the “record” $7.5 billion profit Merrill had reported in 2006 (the last year it would ever report a profit). BoA, Thain, and Lewis also agreed to allow Merrill to accelerate payment of these bonuses so that Merrill could pay them in December 2008, before the merger closed, rather than in January, when bonuses were supposed to be paid at Merrill, to ensure that Merrill would be able to exercise significant control over the bonus amounts and the recipients of the bonuses.
Throughout October and November 2008 – the two months immediately preceding the December 5, 2008 shareholder vote on the merger – Merrill and BoA suffered highly material undisclosed losses that greatly jeopardized the solvency of Merrill and the combined company. In October 2008 alone, Merrill lost a staggering $7 billion. In November 2008, Merrill lost an additional $6.3 billion, and also suffered a goodwill impairment of another $2 billion in connection with the failure of its wholly-owned subprime residential mortgage lender. Thus, by the date of the merger vote, Merrill had lost at least $15.3 billion in just two months – and Merrill was internally projecting billions of dollars of additional losses in December. The losses were
And a slighlty different spin on the Fed's involvement in the fiasco:
After reviewing Merrill’s and BoA’s financial data, senior officials of the U.S. Federal Reserve System (the “Federal Reserve”) concluded that Lewis’s claims of surprise were “not credible,” and that Merrill’s financial deterioration had been “observably under way over the entire quarter.” Indeed, documents and other evidence establish that Merrill’s losses were far greater in October and November 2008 than in December 2008, and that BoA, which had appointed its Chief Accounting Officer, Neil A. Cotty (“Cotty”), to be Merrill’s acting CFO when the merger was announced, knew of these losses as they occurred. Accordingly, Secretary Paulson and Chairman Bernanke told Lewis that invoking the MAC “after three months of review, preparation and public remarks by the management of Bank of America about the benefits of the acquisition” would reveal the falsity of those statements, and “cast doubt in the minds of financial market participants . . . about the due diligence and analysis done by the company, its capability to consummate significant acquisitions, its overall risk management processes, and the judgment of its management.” As Secretary Paulson later testified to Congress, he also told Lewis that, if Lewis invoked the MAC, Lewis, BoA’s senior management, and BoA’s Board of Directors (the “BoA Board”) would be terminated.
After this threat, Defendant Lewis agreed not to invoke the MAC, and to proceed with the merger. However, in order to prevent BoA’s collapse from the weight of Merrill’s losses – which by that point were approaching $20 billion for the quarter – Lewis asked for and obtained a commitment that BoA would receive a $138 billion taxpayer bailout, consisting of a highly dilutive $20 billion capital infusion and an asset guarantee of $118 billion. Recognizing that disclosure of these facts would lead to a shareholder revolt and almost certainly prevent the merger from closing – and thus cost him his job – Defendant Lewis actively concealed the Government’s commitment from his shareholders. In a December 22, 2008 email to the BoA Board, Lewis wrote, “I just talked with Hank Paulson. He said there is no way the Federal Reserve and the Treasury could send us a letter of any substance [documenting the bailout] without public disclosure which, of course, we do not want.”
One wonders just how many civil and/or criminal lawsuits against him will it take for Ken Lewis to finally get the message that people are not crazy with the way he handled the whole Merrill thing. At least according to Gasparino the tipping point may occur if and when the SEC decides not to drop its charge against the firm, and to finally extract its pound of flesh from the guilty parties.At this point this seems like the only way out for the troubled CEO. Yet with the SEC attempting to rectify its devastated public image, it appears that Ken will be the fall guy for the second and last time in his career: first for the benefit of Ben Bernanke, and now, for Mary Schapiro. As to the next logical question of who will replace Lewis, the answer is still unknown although several key candidates are already solidifying.
Full lawsuit presented below, which is a must read for all, who unlike Dick Bove, think that lying to your shareholders about the mismanagement of several tens of billions of dollars, is actually a kinda of a big deal.